- One Europe exchange-traded fund had record outflows last week
- Investors are hedging against more declines via options market
Investors don’t need proof that 2015 is a rough year for stocks. In Europe, traders are preparing for it to get worse.
Causes of pessimism include doubts about China’s economy, confusion about Federal Reserve policy, weak corporate profits, and, just last week, a shocking miss in U.S. jobs data. The back-breaker for European investors? A German car company scandal of global proportions, combined with unprecedented turmoil in a certain mining firm.
It all triggered a record $462 million in weekly outflows from an exchange-traded fund tracking European stocks after months of inflows. In the options market, the volume of contracts hedging against losses last month jumped to its highest level in more than a year relative to bullish wagers.
“Europe had been one of the most popular investment destinations in the previous 18 months, and therefore is one potential source for liquidity when people want to reduce exposure,” said Stewart Richardson, chief investment officer at RMG Wealth Management in London. “Investors have started to look at financial markets in a slightly different light than at the beginning of the year, when they assumed that QE would be great for financial assets. Equity markets are going into a bear market.”
The Stoxx Europe 600 Index dropped as much as 18 percent since its record in April, and Germany’s DAX Index lost 23 percent from its peak through the end of last week. All major western-European measures retreated 10 percent or more since their highs.
Europe’s benchmark equity measure jumped 3 percent on Monday.
The lion’s share of withdrawals from the WisdomTree Europe Hedged Equity Fund, the largest to follow the region’s stocks, came last week, after an unprecedented selloff in Glencore Plc took the rest of the market down with it. Investors already jolted by a slump in Volkswagen AG the week before -- and a rout led by China and the Fed earlier -- rushed to close their Europe positions before the end of the quarter.
While the WisdomTree fund doesn’t hold any Glencore or Volkswagen shares, the worst-hit European sectors are well represented in its stock allocation -- with an 8.4 percent exposure to auto-related companies and 7.4 percent to commodity producers.
WisdomTree’s fund is traded in the U.S. and hedges against currency fluctuations, making it unique from other funds tracking European stocks. But those aren’t doing much better either. The Vanguard FTSE Europe ETF, the second biggest following the shares, had its smallest monthly inflows since January.
Where some see a disaster, others find opportunities. Barclays Plc’s wealth-management unit head of investment strategy William Hobbs says it’s just a matter of time until the stock market again reflects the region’s recovery. Economic confidence unexpectedly increased to the highest in more than four years last month, consumer spending is benefiting from receding unemployment, and the head of the central bank, Mario Draghi, said last week that growth is returning in Europe.
“The markets are pretty febrile and risk appetite is skittish, but looking at the real economy it looks OK,” Hobbs said by phone from London. “The world economy doesn’t look to be ready for a recession yet, and that suggests there may be more upside for equity markets.”
With volatility expectations for European markets running at around a three-year high, perhaps the worst has just begun.
“We’ve seen several pretty disastrous developments that have really spoiled the mood among investors,” said Matthias Jasper, head of equities at WGZ Bank in Dusseldorf. “One has to realize that a lot of aspects are now threatening the economy in Europe and globally.”